With a bank savings rate of 0.11% and an inflation rate of 5.20%, leaving your money in the bank means that your money is getting eroded, slowly but surely.
There's a better way to preserve your wealth without taking excessive risk. It's called Fixed Income.
What are Fixed Income or Bond Funds?
The next safest thing to fixed deposits and savings accounts, bonds are generally low risk and yet generally offer a higher return. There are many types of fixed income unit trusts, for example, high yield bonds, short duration bonds, and so on. It is important to select the right types based on your risk appetite, the anticipated economic and interest rates environment. Some are not as risky, while others are more volatile. The returns are of course correlated with the risks.
Why you should not leave all your money with banks
Basically, putting money in bank savings accounts or fixed deposits are almost-guaranteed ways to "lose money", because in Singapore, inflation has been consistently higher than what banks are giving. Here are some figures on Singapore's savings and fixed deposit rates versus inflation.
Table 1: Singapore savings and fixed deposit rates VS inflation
Source: MAS, iFAST compilations.
As shown, most of the time, savings and fixed deposits are unable to even cover inflation. Another disadvantage of fixed deposits is that your money is tied for a fixed period of time, e.g. one year. If you try to withdraw the money before it matures, you may have to pay a penalty.
Why you should move your savings into bond funds
While bond funds are lower risk, they may still fluctuate in value. So if you need your money urgently, say, within 6 months, it would be safer to leave it in the bank.
Different types of bonds have different risk level. Some bonds are safer, like short-duration bond and SGD-centric bond funds. Other bonds are riskier, like emerging markets bonds and high yield bonds.
In this article, we will focus on short-duration bonds.
Short-duration bonds invest in short term debt securities with a majority of these debts maturing within 3 years.
The general principle of bonds is that, bond prices moved according to interest rate changes. However short-duration bonds are less affected by interest rate movements due to their short maturity. Thus, they act as an defensive alternative to rising interest rates.
What are the benefits of investing in short-duration bonds?
- They are much more liquid than fixed deposits, as they can be redeemed or sold anytime and you can get your money back within a week.
No transaction cost
- 0% sales charge for short-duration bonds.
Higher returns - They have the potential to give higher returns than fixed deposits with an acceptable increase in risk.
What kind of returns can you expect?
Here are some return statistics on two of our recommended low-risk bond funds, which are Singapore-centric.
As shown, the funds have a much higher chance of delivering positive returns. Note that the 5-year returns include the impact of the Global Financial Crisis. Assuming that you are saving for more than 1 year, most of us would be better off investing in low-risk bond funds rather than in savings or fixed deposits.
Putting it in a graph:
Assuming that you had invested $10,000 equally into the two fixed income funds since Jan 2006, you would have made around $2,600 on Jan 2012. This is about 7 times of what you would have gotten from 1-year fixed deposits over the same period, and 23 times for savings deposits!
For the less conservative, we also offer a fixed income fund that invests in short-duration bonds in Asia, i.e Aberdeen Asian Local Currency Short Duration Bond fund, and another that is AUD-hedged i.e Nikko AM Shenton Short-Term Bond (A$) fund. These funds may fluctuate more than SGD-focused short-duration funds.
In conclusion, investors should review the money they hold in fixed deposits and savings accounts. Banks usually roll over fixed deposits automatically when they mature and at the prevailing interest rate, which are presently very low. There are alternatives out there which may entail slightly higher risk, but give a much better return.
Open an account here.
If you are new to unit trusts or need advisory service, contact our Client Investment Specialists at email@example.com.
Short Duration Funds – When Short is Stout